“RAJ SINGH B.E.M.B.A.

OVERVIEW

Raj Singh received his M.B.A. degree in 1985 from the local college and
he went to work for ECC, Ludhiana.

As, he had done his graduation in B.Tech (Mechanical Engineering)

after, completing his post graduation, he was interested in Finance or
Marketing but he landed in a production job.

In, 1985, he assumed new duties; he

took over the charge of parts Fabrication shop. When he took over the
charge, Mr.Sarin, a plant manager that he had responsibility to see the
responsibility to see that five components which are being produced by
shop, should be outsourced or manufactured with in the factory so that
the cost should be minimum. After receiving this responsibility, he
consulted all the considerations with plant accountant, Mr.Chopra and
they together agreed on product line cost analysis report, which will
show them actual cost of producing the one unit each of five parts
during period.

A) From the above case study, we found that Raj Singh had allocated
the overhead expenses on basis of Direct Labour / Hour to
various products.
B) We have also the seen that total cost of the product was also
increased as we move from 1st to 2nd and 3rd Quarter.
C) The reason for increase in total cost was due to increase in the
overhead expenses and minisculine increase in direct expense too.
We found that overhead expenses increased from Rs. 3, 70,216 to
Rs. 3, 83,998 to Rs. 3,93,992.
D) Mr. Singh was in dilemma that he should make or buy the
product as bid price was quite low as compared to cost of
production in the 3rd quarter.
 Now, he had to take the decision whether he should make or buy the
product, before making his decision it had to be insured that cost has
to be calculated in correct manner i.e. the allocation of overheads is
done correctly to all the products. For the allocation, we have given
the alternatives.

Decision Process (With Alternatives):

Actual Data

direct labour 1,39,756

labour hrs 39,930.29
direct material 3,11,680
total prime
cost 4,51,436

overheads actual
departmental 1,00,216 2.509774178
depreciation 1,20,000 3.0052377
general 1,50,000 3.756546722
total 3,70,216 9.2715586

cost element 101 102 103 104 105

labour 8.48 13.3 5.25 7.33 4.31
2.422857
labour hours (8.48/3.5) 3.8 1.5 2.094286 1.231429
material 18.4 24 14.8 17.2 13.6
total prime
cost 26.88 37.3 20.05 24.53 17.91
22.46366
( 9.27 x
overhead 2.42 ) 35.23192 13.9073379 19.41729 11.41726
total cost 49.34366 72.53192 33.9573379 43.94729 29.32726
production 3300 4000 3200 4200 2600
a. 139756 / 39930 = 3.5

The above exhibit shows the actual overhead allocation done

by Raj Singh. In this exhibit the overhead allocation was done
on the basis of the direct labour hours ( 3,70, 216 / 39,930 )
which might not be appropriate as he totally relied upon single
macro variable i.e. labour. so, we have suggested some
alternatives.

Alternative 1
Overheads allocation on the basis of Units Produced:
In the above exhibit we have allocated the overheads on the
basis of the units produced. But the problem in this allocation
was that we again relied on a single macro variable i.e. units
produced which again might not be appropriate for allocation
of overheads.

Alternative 2)
Allocations of Departmental supervision overhead on the basis
of Direct Labour Hours and Depreciation and General
overheads on the basis of units of Production.
Alternative 3

Allocation of Departmental supervision & Depreciation

Overheads on basis of Direct Labour Hours, Allocation of
General Overheads on basis of/unit:
Alternative 4) Keeping Depreciation on basis of per unit &
Departmental and General Overheads on basis of Labour/hr

THE RELEVANT CONCERNS ARE:

1. WHAT SHOULD BE THE CORRECT COST OF THE

VARIOUS PRODUCTS ?

2. WHAT SHOULD BE THE CORRECT DRIVER?

3. WHAT SHOULD BE THE STRATEGY OF THE FIRM?

4. IS DISCONTINUING THE ONLY OPTION

AVAILABLE?

5. HAS RAJ DONE HIS ANALYSIS CORRECTLY?

6. IS RAJ RESPONSIBLE FOR THE WRONG

DECISION?